Employer Initiatives

CHOICE Arrangements: A Guide for Employers

A CHOICE Arrangement is a type of health reimbursement arrangement (HRA) that allows employers to give employees tax-free money to buy their own individual health insurance, instead of offering a traditional group health plan. CHOICE Arrangements were previously known as Individual Coverage Health Reimbursement Arrangements (ICHRAs). Instead of selecting one or more group health plans for everyone, the employer provides employees with a fixed dollar amount that employees can use to purchase their own individual health insurance coverage and possibly their family members if the employer chooses to offer the CHOICE Arrangement to family members, too.

Employees choose the coverage that works best for them based on factors like:

• Monthly premium after factoring in what they can use from their employer to help cover costs
• Prescription drug coverage
• Deductibles and out-of-pocket costs
• Preferred doctors and hospitals in network
• Anticipated healthcare needs of their family

When enrolled in a CHOICE Arrangement, employees own the individual health insurance coverage they select. If they leave their job, they generally may keep their individual health insurance coverage as long as they continue paying premiums (noting the CHOICE Arrangement wouldn’t be available anymore to help with costs).

Benefits of Offering a CHOICE Arrangement 

Employers may consider offering a CHOICE Arrangement for different reasons including the structure of their workforce, budget considerations, and administrative needs. Some employers may explore CHOICE Arrangements because their traditional group health plan premiums have increased significantly from year to year. Employers (particularly smaller employers) may also be looking for a way to offer a health benefit for the first time and want to do it in a way that offers flexibility and more choice to their employees. This ability to offer greater choice and flexibility may help employers compete for employee talent. Other employers may have workforces that are difficult to support through a traditional group plan, such as those with employees in multiple states. 

Employee Participation

Eligible Coverage Under a CHOICE Arrangement

CHOICE Arrangements can be used to reimburse premiums for the following qualifying coverage:

• Individual health insurance purchased on the Marketplace (such as through HealthCare.gov),
• Individual coverage purchased “off-Exchange”* (directly from an insurance company or facilitated by an agent or broker directly with a health plan or through an online enrollment platform), 
• Medicare Part A and Part B, or
• Medicare Advantage (Part C) 

* Off-Exchange individual health insurance coverage refers to enrollments in individual market major medical insurance coverage that are facilitated by an agent or broker directly with a health insurance issuer or through another online enrollment platform, rather than through a Health Insurance Marketplace such as Healthcare.gov or an EDE platform facilitating enrollments through a Health Insurance Marketplace. This does not include non-Affordable Care Act (ACA) qualified products like short-term, faith-based, indemnity, or supplemental plans. 

Employee Eligibility for a CHOICE Arrangement

When an employer establishes a CHOICE Arrangement, one of the first decisions is determining which employees will be eligible to participate, whether spouses and dependents are eligible to participate, and whether they will offer a CHOICE Arrangement to all their employees or only certain permitted classes of employees. It is important to understand the rules when designing a CHOICE Arrangement.

There are 10 employee classes that an employer may use when designing their CHOICE Arrangement:

• Full-time employees
• Part-time employees
• Seasonal employees
• Salaried employees
• Non-salaried (such as hourly) employees
• Temporary employees of staffing firms
• Employees covered by a collective bargaining agreement
• Non-resident aliens with no U.S.-based income (generally, foreign employees who work abroad)
• Employees that haven’t satisfied a waiting period
• Employees working in the same rating area

Employers may also use a combination of two or more classes. 

For Applicable Large Employers, eligibility decisions may also affect whether the employer satisfies Affordable Care Act (ACA) employer shared responsibility requirements.

CHOICE Arrangements are a way for employers to provide tax-favored benefits to employees, and thus the tax code doesn’t allow employers the ability to provide a tax-favored CHOICE Arrangement to self-employed independent contractors.

As employers begin planning on potentially offering a CHOICE Arrangement for employees, many evaluate whether they will administer the arrangement internally or work with a third-party administrator (TPA).

Cost and Contribution Strategies

Contribution Strategies

There are many successful contribution strategies. As an employer explores options, CHOICE Arrangements have the flexibility to find the best fit for your company. Employers often evaluate:

• Overall healthcare budget
• Workforce demographics
• Employee premium costs in local markets
• Whether the employer is an Applicable Large Employer
• Recruiting and retention goals
• Existing benefit strategies
• Administrative simplicity

There are ACA standards for Applicable Large Employers to offer affordable coverage or potentially make an employer shared responsibility payment. Employers can learn more by visiting the Internal Revenue Service (IRS) ACA tax provisions for large employers webpage.

CHOICE Arrangements themselves are funded entirely by employer contributions. Some employers may choose to pair CHOICE Arrangements with a Section 125 Cafeteria Plan so employees can deduct money from their paychecks to cover certain healthcare expenses, including insurance premiums, on a pre-tax basis.  

A Section 125 Cafeteria Plan is especially beneficial when the employee’s individual health insurance premium is greater than the employer’s CHOICE Arrangement contribution and the employee must pay the remaining premium amount out of pocket.

However, there is an important consideration when pairing CHOICE Arrangements with a cafeteria plan. Employees generally cannot use a cafeteria plan to pay the remaining premium for “on-Exchange” coverage purchased through a Marketplace such as HealthCare.gov or any other state-based Exchange (SBE). 

This means employees generally must enroll in health insurance coverage outside the Marketplace, or off-Exchange, if they want to use pre-tax salary reductions through a cafeteria plan to help pay their share of the premium.

Some employers structure the CHOICE Arrangement to reimburse insurance premiums only, while others reimburse insurance premiums and other qualified medical expenses (QMEs). Each employer must decide which medical care expenses they will reimburse under their CHOICE Arrangement.

Reimbursements are generally tax-free to employees and tax deductible to employers when applicable requirements are satisfied.

Determine Contribution Amounts and Evaluate Affordability

Employers can offer the same contribution amount across their entire workforce. Federal rules also allow employers to vary contribution amounts within a permitted class of employees based on employee age and number of dependents.

This flexibility can help employers consider factors such as health insurance premiums that often vary based on these factors when deciding on contribution amounts. For example:

• Older employees typically face higher health insurance premiums than younger employees.
• Employees covering spouses or dependents may have significantly higher premium costs than employees enrolling in self-only coverage.

Age-Based Contribution Variation

Age-based contribution variation is limited under federal rules. The oldest employee’s contribution amount cannot exceed three times the contribution amount provided to the youngest employee.

For example, if the youngest employee receives $200 per month, then the oldest employee cannot receive more than $600 per month.

Family Size and Dependent Contributions

Employers may also vary contributions based on the number of covered dependents.

For example, an employee enrolling only themself in a CHOICE Arrangement may receive one contribution amount and an employee enrolling themself, a spouse and children in the CHOICE Arrangement may receive a larger contribution amount. 

Employers generally have flexibility in how they structure these family-based contribution increases. Some employers may:

• Offer a flat additional amount for dependents
• Increase contributions incrementally based on the number of covered family members
• Create separate contribution structures for self-only, self-plus-one, and family coverage

Employers must structure these contribution approaches consistently within employee classes and in accordance with applicable federal rules.

Download a customizable Cost Estimator tool (XLSX) to explore both the cost of CHOICE Arrangements including estimating your business’s monthly costs, and see what employees may pay.

Get Help Exploring CHOICE Arrangements

A third-party administrator (TPA) is an organization that can help employers manage the administrative and operational functions associated with a CHOICE Arrangement. While some employers, particularly smaller employers with simple premium-only arrangements, may choose to administer certain functions internally, many employers work with TPAs because CHOICE Arrangement administration can involve ongoing documentation, reimbursement processing, employee support, and compliance-related responsibilities.

For employers that are only familiar with traditional group health plans, CHOICE Arrangements may feel very different. Under a traditional group health plan, employees might enroll in a plan selected by the employer and the health plan or TPA manages many ongoing functions, such as claims processing and provider networks. Under a CHOICE Arrangement employees are selecting their own individual coverage, reimbursements must be substantiated and tracked by the employer, and documentation must be reviewed and maintained.

Because of this, employers often evaluate whether they have the internal staff, systems, and operational capacity needed to manage these processes on their own. TPAs can provide different services and there are many TPA options to choose from. TPAs may help employers with:

• Employee onboarding for a CHOICE Arrangement
• Enrollment verification
• Reimbursement processing
• Documentation collection and storage
• Compliance, including tax reporting
• Employee communications
• Reporting and tracking tools
• Integration with enrollment platforms
• Ongoing employee support

Some TPAs also provide:

• Decision support tools
• Mobile applications
• Premium payment integrations
• Marketplace enrollment support
• Broker portals
• Payroll integrations 

Review available third party-administrators that support CHOICE Arrangements (PDF) to explore your options and implement a plan for your business.

Agents and brokers can also help employers understand eligibility requirements, coverage options, and costs to decide if traditional group coverage or a CHOICE Arrangement fits the needs of their business and employees. 

Other Employer Guidance and Resources

Other Employer Guidance and Resources

• Sample 2016 Employer Notice (PDF)
• Fact Sheet: Spring 2016 Employer Notices (PDF)
• Frequently Asked Questions Regarding The Federally-Facilitated Marketplace’s (FFM) 2016 Employer Notice Program (PDF)
• Employer Appeal Request Form (PDF)
• Questions and Answers on Employer Shared Responsibility Provisions Under the Affordable Care Act
• Employer Coverage Tool (English) (PDF)
• Employer Coverage Tool (Spanish) (PDF)
• ACA Anti-retaliation provision
• Employer Appeal Document Verification Guide (PDF)
• Individual Coverage Health Reimbursement Arrangements: Pre-Open Enrollment Period Training, Fall 2019 (PDF)

Employer Notice and Appeals

The Affordable Care Act and implementing regulations require each Health Insurance Marketplace to notify an employer whose employee enrolled in a Qualified Health Plan with Marketplace financial assistance.  An employer that receives an employer notice may appeal the Marketplace’s determination that it does not offer minimum essential coverage that is affordable to the employee and meets minimum value. The IRS will independently determine any liability for the employer shared responsibility payment. Whether or not an employer chooses to appeal will not have any effect on the IRS’s determination of liability for the employer shared responsibility.  

Employer Verification Study

CMS is requesting information from some employers about the Employer-Sponsored Coverage (ESC) offered to employees for the 2016 plan year. A CMS contractor may contact employers by telephone between April 2016 and June 2016 during the hours of 9 AM to 12 PM and 1 PM to 5 PM (local time for each business). Each call is expected to last 10-15 minutes.

Employer participation will enable CMS to evaluate for plan year 2016 whether an employee, or a sample of employees, correctly attested that he or she was not offered ESC that met affordability and minimum value requirements:

• Affordability: An employer-sponsored plan is affordable if the employee’s share of the annual premium for the lowest cost self-only plan (LCSOP) that meets the minimum value standard is less than 9.66% of individual’s annual household income in 2016.
• Minimum Value: A health plan meets this standard if it’s designed to pay at least 60% of the total cost of medical services for a standard population, and if its benefits include substantial coverage of inpatient hospital and physician services. This information should be in the Summary of Benefits and Coverage (SBC) Sheet. You also may have a Report of Minimum Value Certification from an actuary accredited by the American Academy of Actuaries (AAA).

Employers will be asked to provide information regarding the lowest-cost self-only health plan that they offered for plan year 2016, as well as their employees’ eligibility for employer-sponsored coverage.

Participation in this study is voluntary.

If you are an employer and have any questions, please contact the Marketplace Employer Hotline at 1- 800-355-5856 (TTY: 711), open Monday through Friday 9 am – 7 pm ET.

Letter to Employers, Plan Sponsors, and Issuers on coverage loss in Medicaid and CHIP

This letter (PDF) to Employers, Plan Sponsors, and Issuers urges them to match the steps taken by HealthCare.gov by allowing employees and their dependents who are losing coverage in Medicaid and the Children's Health Insurance Program (CHIP) to enroll anytime through July 31, 2024, in recognition of the complicated transition and the importance or maintaining life-saving coverage for employees and their families.